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Better on symptoms than remedies.

Jesse Norman, Compassionate Economics, Policy Exchange and the University of Buckingham Press Ltd, 2008

Jesse Norman is a Senior Fellow and former Executive Director of Policy Exchange. He is also the Conservative Party candidate for Hereford and South Herefordshire. This short book is the second part of a larger project aimed at providing a coherent intellectual and practical basis for the New Conservatism (available on-line at The first part, published in 2006 under the title Compassionate Conservatism, traces the historical roots of this project and develops the concept of the 'connected society', a term intended to shift attention away from the 'vertical' relations between individuals and the state which have preoccupied political thinkers since Hobbes, towards a 'horizontal' concern with social institutions and human relationships

It would be a mistake to dismiss compassionate conservatism simply because the badge was once worn by George W. Bush. Neither 'Red Tories' such as Phillip Blond nor 'Tory Whigs' such as Jesse Norman have anything in common with the US neo-cons. Rather, at a time when the New Labour project lies in ruins and the temple of neoliberalism is badly damaged (though far from destroyed), these New Conservatives are openly critical of certain aspects of the Thatcher revolution, seriously concerned about Britain's 'broken society', and eager to remind their fellow Conservatives of their party's intellectual heritage, from Burke's organic view of society to Carlyle's polemics against laissez-faire capitalism and Ruskin's critique of liberal political economy. Not surprisingly, given this provenance, many of the criticisms that 'red' or 'compassionate' Tories level at New Labour and mainstream economics echo those made by the democratic left, certainly as regards the symptoms of Britain's social crisis and even in terms of basic values, though as I argue later, they misdiagnose the state we are in and their proposed remedies are unconvincing, not least because if the Conservatives win next year's general election and take an axe to public spending at a time when GDP has stopped falling but recovery is by no means assured, the resulting economic hardship is likely to damage social cohesion still further.

The argument of Compassionate Economics is that even before the onset of the great recession in the autumn of 2008, the UK's economic performance since 1993 had flattered to deceive. It looked good compared with the crisis-torn 1970s, the recession-wracked 1980s and the sclerosis that afflicted the eurozone in the 1990s. But in fact, the UK grew more slowly than other rich, free-market, Anglophone economies and its growth was driven by simultaneous booms in government spending, immigration, house price inflation and personal debt, against a backdrop of low interest rates and easy credit, all ephemeral factors that did nothing to strengthen the underlying foundations of prosperity: productivity, social institutions and the education system. Indeed, the multiple social disorders that accompanied Britain's debt-fuelled spending spree, manifested in levels of drug abuse, binge drinking, teenage pregnancy, family breakdown and child mental illness that are far worse than those found in other affluent countries, suggest a society which is deeply troubled and dysfunctional.

Norman attributes both the flawed economic boom and the unfolding social crisis to the malign influence of what he calls the standard economic model, sometimes known as 'rigor mortis economics', a body of ideas about markets and government which over the past forty years has not only dominated the teaching of economics and the conduct of public policy, but has even taken root in everyday life. The model, a sophisticated mathematical construct based on the assumption that all economic agents - individual persons, commercial firms and public agencies alike - are self- interested rational maximisers, describes the operation of an idealised competitive market economy in abstraction from any specific form of social life and uses deductive reasoning to demonstrate that, if it existed, such a system would satisfy people's wants and preferences to the maximum extent and at the lowest cost possible, given available resources and technology. Questions of distribution - who owns what, who gets what and whether the rules of the game are fair - are a separate matter on which economists qua economists make no comment. They do, however, concede that wherever actual markets deviate from the ideal conditions assumed in the model, the resulting 'market failure' creates a prima facie case for government intervention to produce an outcome closer to the optimum, as if the fault lies in reality, not the model.

There is, as Norman notes, abundant evidence that people do not behave as rational economic maximisers: they are, for example, biased towards the present and the status quo, even in the face of incentives to change; they do not systematically evaluate alternatives; they are influenced by the way choices are framed; and their motivations are not reducible to the lure of gain or the fear of loss. Neither does the standard model do justice to the dynamic, liquid character of real markets, understood as historically evolved and culturally embedded forms of social interaction; while the concept of market failure is so elastic as to give government almost unlimited licence to intervene. And the effect of ignoring social institutions and relationships is to establish a presumption in favour of centralisation and the command-and-control mentality which, when applied to the public services, has done untold harm, lowering professional morale, undermining public trust, and creating a whole new layer of officialdom to monitor, inspect and audit the performance of public agencies.

Norman singles out the tax credit system devised by Gordon Brown and administered by the Treasury as a particularly egregious instance of centralised, over-complex and wasteful micro-management, which few people understand and which, far from enhancing income security, causes anxiety and hardship whenever (as happens all too frequently) claimants are overpaid and the authorities subsequently demand repayment. This said, he fails to explain why the government opted for this particular anti-poverty policy rather than any other, and offers no preferred alternative of his own. It is also worth noting that tax-credits are descended from the idea of a Negative Income Tax, proposed by Milton Friedman in 1962, with cavalier disregard for the problems of implementation that always arise in connection with plans for reforming social security.

Much of what is wrong with received economic theory stems from its impoverished conception of the person. Stripped of their social characteristics and abstracted from the cultural settings that give shape and meaning to their lives, human individuals become atomised bearers of wants and preferences, mere vessels for transient experiences of pleasure and pain. In place of this solitary, passive and hedonistic conception of the self, Norman commends a view of the person as an active, autonomous acquirer and exerciser of capabilities, changing and developing over time, involved in a variety of social relationships and constantly seeking outlets for self-expression.

The active self is one aspect of compassionate economics, with far-reaching implications for the education system. The other is what Norman calls the social foundations of economic prosperity: a flourishing civil society; a judicious blend of competition and co-operation; and a vigorous entrepreneurial spirit, broadly understood in terms of open-minded inquiry and creative thinking, not simply as having an eye for the main chance. The financial crash of 2008 forces us to rethink economic theory and policy from the ground up. Compassionate economics is not a new set of policies, but a new paradigm, a set of guidelines for producing policies. Norman claims that if this paradigm becomes established in public discourse and institutional reform, it holds out the promise of replacing the kind of casino capitalism that has evolved in Britain over the past thirty years with a more solid, stable and civilised variety.

As indicated earlier, the democratic left can happily endorse much of this argument. Critics of neo-classical economics have long complained that it treats human individuals as asocial atoms and that its understanding of the market is ludicrously mechanistic. And the concept of the active, developing self should commend itself to anyone who subscribes to the ideals of personal autonomy and participatory democracy, for only people who are capable of thinking for themselves and making their own reflective choices and decisions will have the capacity and desire to participate in the business of governing, including the governing of business.

Neoclassical economics undoubtedly helped to shape the mindset and policies that have brought Western capitalism in general, and Britain in particular, to their present parlous condition. The prime culprit, however, is not the standard economic model, but rather the neoliberal political project which it helped to inspire and legitimise.

Neoliberalism - a term, incidentally, which is conspicuous by its absence from Norman's account - was forged in opposition to Keynesian social democracy, the fusion of social democratic politics and Keynesian economics that governed public policy during the 'golden age' of post-war capitalism from 1945 to 1975. But neoliberalism was always more than a recipe for quelling inflation, corralling the public sector, replenishing corporate profits and restoring the primacy of market forces in economic life. Behind its harsh remedies for the economic failings of the old regime, lay the idea that the good society is one in which individuals enjoy maximum (and, in principle, equal) freedom to seek their own salvation in their own way so long as they do no harm to others. According to neoliberals, the form of society that best enshrines this ideal is one based on private ownership of productive assets, free contracts, competitive markets, commercial money and generalised commodity production. The only legitimate role of government is to establish (or re-establish) the institutions and norms that underpin these conditions.

Neoclassical economics was only one of the sources and component parts of the neoliberal project. The others, in no particular order of importance, were Hayek's restatement of classical liberalism and the Austrian tradition of economic thought; Chicago monetarism, as expounded by Milton Friedman; and the theory of public choice developed in the 1960s by writers such as James Buchanan, who sought to apply the model of homo economicus to the behaviour of governments, bureaucracies and voters. To be sure, these diverse schools of thought are not altogether compatible. There is, in particular, a major theoretical disagreement between neo-classical economists, who equate uncertainty with risk and seek to show how market forces steer the economy towards a state of general equilibrium (a concept borrowed from Newtonian physics), and their Austrian rivals, who see the market as a framework for trial, error, discovery and innovation and have no time for the concept of equilibrium. But political projects, unlike logical arguments or scientific theories, do not need to be totally free from inconsistency: indeed, up to a point, internal tensions are a source of strength. At the end of the second world war, for example, the policy paradigm we now call Keynesian social democracy appealed to liberal collectivists and one-nation conservatives, as well as to social democrats. Similarly, when this paradigm proved incapable of resolving the organic crisis of the 1970s, neoliberalism provided a rallying point for all those who wanted to dismantle the post-war settlement and found a new kind of state.

Now that the neoliberal project in turn is in crisis, the challenge is to promote economic recovery, rebuild social cohesion and combat global warming, all at the same time. Norman has nothing to say about environmental issues, and although he recognises the gravity of Britain's social problems, he appears to share the Tory leadership's view that our best hope of escaping from recession is to reduce the scale of public borrowing by cutting public expenditure, a policy which could easily cut short any incipient economic upturn and plunge us into a 1930s-style depression. This is not to deny that Keynesian reflation poses difficult problems of public finance. Nevertheless, in a situation where capitalism has come to the end of a long consumer boom and cannot be revived by efforts to get the private sector to take on yet more debt, it is better for government to act as 'spender of last resort' than to wait for market forces to engender a 'spontaneous recovery', a process that could take many years and would do nothing to combat climate change, but would almost certainly exacerbate Britain's social decline.

From this standpoint, our best hope lies in a green new deal, focusing on projects which are centrally sponsored and financed, but locally planned and implemented, and which bring together central government, local authorities and civil society in a concerted effort to cut carbon emissions, conserve energy and increase energy efficiency. Indeed, the revival of social hope and the emulation of Obama's 'can do' politics could rekindle what Keynes called the 'animal spirits' of enterprise - the will to act and create without knowing for certain whether the venture will succeed - thereby re-stimulating private investment and reducing the need for deficit-financed public spending.
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Title Annotation:Compassionate Economics
Author:Purdy, David
Article Type:Book review
Date:Jun 22, 2009
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